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Factors to consider when filing tax returns

At the beginning of October, the South African Revenue Service (SARS) announced that over 2.7 million people had filed their returns already and it had paid over R62.1-billion in tax refunds. Even though the tax season opened on 1 July, some people still procrastinate when it comes to filing their tax return. There are a few factors that these procrastinators need to consider when reviewing their tax situation.

This is according to Nico Coetzee, Executive: PPS Financial Planning, who states that people must realise they can only get a refund if they file their return.

Why you need to complete your tax return

If you need to apply for a home loan or your business is tendering for a new project, you will need a tax clearance certificate. A tax clearance certificate will only be issued if your tax returns are up to date. Another important reason to file tax returns is because as soon as you retire, or receive a severance package, the fund will need to ensure you are tax compliant before any funds will be paid to you. Lastly, SARS issues tax payers with penalties for returns that have not been submitted in prior years.

Deadlines

SARS has implemented various deadlines over the years for the different types of returns. Complying with these various deadlines can be stressful, which is why it is beneficial to get some advice to ensure deadlines are met.

Documentation and audits

Supporting documentation is of utmost importance when filing tax returns. All tax documents must be ready to submit if SARS wants to audit your submitted tax return. If you are being audited, SARS will send you a standard verification document requesting all the applicable supporting documentation. It is important to provide SARS with all the required documentation applicable to your income tax return at the first instance, otherwise this might delay the process of the audit.

Income

We always recommend that our clients review their IRP5 codes to ensure the income declared to SARS is actual taxable income received. We have sometimes seen that non-taxable income was declared as taxable income, this will mean you will be paying more taxes than necessary. If you do find any mistakes, your employer will have to re-submit your IRP5 to SARS before you submit your final tax return.

Declare all income

It is important to declare all income received throughout the year, even though certain income might be deemed to be exempt. Other types of income include dividends, interest, donations, foreign income as well as distributions received from family trusts. Exemptions allowed by SARS currently include the interest exemption, capital gains tax exemption and the foreign income earnings exemption.

Offshore investments

The tax implications of offshore investments is often not considered. South Africans are taxed on their world-wide assets and income received, therefore any income received from an offshore investment is fully taxable. Proper advice is recommended when taking your hard earned cash outside of the borders of South Africa, as there are various structures available when implementing such an investment strategy.

Tax deductions for individuals

SARS has made changes over the past decade to simplify the tax deductions for individuals, but with this process they have also streamlined and limited tax deductions for individuals. Fortunately the Government still incentivises tax payers, mainly through retirement contributions and tax free savings accounts (TFSA’s). Individuals can contribute up to 27.5% of their taxable income to a retirement fund, but limited to an amount of R350 000 per year. On top of the retirement contributions, individuals can also contribute up to R33 000 per year to a TFSA. Both these investments will grow tax free.

Carry-over balances

We have seen problems with this year’s SARS e-filing system where the carry-over balance from the previous year’s retirement annuity contributions have not been carried forward correctly. This might cause unnecessary confusion and result in certain contributions not being considered as an allowable deduction. This is why it is a good idea to compare your current tax return submitted to the tax return from the previous year which was assessed by SARS to check for any balances that need to carried forward or other items of note.

Trusts

Trusts have been a major focus area for SARS over the last couple of years. In summary, from 1 March 2017 interest free or low interest loans to trusts have possibly become taxable. Loan accounts with related parties can be a very complex area from a planning perspective, again we would advise proper consulting before making any decisions going forward.

Home office expenses

Working from home has become very common these days, but ensuring you can deduct home office related-expenses can be very complex. There are a few things you need to ensure to do this: your contract with your employer must clearly state that you can work from home; that more than 50% of your working time is actually spent at home; and a certain area within your home is exclusively and specifically equipped for your trade. Actual expenses that can be deducted include rent, interest on bond, repairs, rates and taxes, cleaning and wear and tear based on the pro-rata office area in your home.

SARS correspondence

SARS correspondence can be confusing, even though they have also provided us with the necessary guides to interpret the correspondence. If you do not agree with the SARS assessment or how your refund has been audited, you either have to do a Request for Correction, Dispute, Documents for Review, Notice of Objection, Notice of Appeal etc. The best advice would be to check your e-filing inbox regularly for any feedback from SARS, or even better to get a tax practitioner involved sooner rather later.

“With the above in mind, we always recommend that people seek financial advice from their financial planner in order to get assistance where needed when it comes to taxes,” Coetzee concludes.